For Start-Ups, How Many Angels Is Too Many?

Nancy Hua, top, is the chief executive of Apptimize, a start-up that raised about $2 million from 21 angel investors in the space of a couple of days. Almost 3,000 angels made such investments last year, including major players in Silicon Valley

Shortly after presenting her start-up to potential investors at a conference, Nancy Hua was bombarded by eager suitors. A little more than 48 hours later, the Silicon Valley entrepreneur had amassed about $2 million from wealthy individuals known as angel investors.

The total number of angels that Ms. Hua raised money from: 21. And she could have gotten more if she had not cut them off.

“Thirty seconds into my pitch, three people emailed me saying they wanted to invest in my company,” Ms. Hua, 29, said of the experience raising money for her start-up, Apptimize, for which she announced the funding last year. “We had dozens of people whose money we turned down.”

For entrepreneurs, nabbing numerous angels — and prominent ones to boot — has become a kind of trophy collecting, a chase that comes with some risk for their companies. And for many relatively new investors, a winning bet on a hot start-up can pay off richly in Silicon Valley cultural capital.

Last year, over 2,960 angels participated in a financing round, more than triple the 822 angels who did so in 2010, according to CB Insights, a research firm that studies venture capital. There is even a moniker for financing rounds that have many angels with no lead investor: “party rounds.”

“Seed investing is the status symbol of Silicon Valley,” said Sam Altman, president of YCombinator, the start-up accelerator that has birthed companies such as Airbnb and Reddit. “Most people don’t want Ferraris, they want a winning seed investment.”

But while young founders are taking advantage of what is probably one of the best times to be raising venture capital, there can be serious downsides. When many angels are involved, for example, no one investor may feel compelled to help the company if it runs into trouble.

Yet at the same time, having a dozen or more on-the-ground investors can also mean a dozen or more opinions about company strategy.

Danielle Morrill, chief executive of Mattermark, discovered this firsthand. She founded the start-up, which tracks the growth of private companies, in 2013 and said she ended up with almost 160 investments from individuals, many of whom wrote roughly $50,000 checks. The investors often chime in about Mattermark’s product direction, she said, and to be polite, she is encouraging to them.

“You want to keep tapping into their collective intelligence so you keep saying ‘Thank you for the feedback’ and they keep sending it,” Ms. Morrill said. “But then you are sitting there alone at 3 a.m. and you have to decide on just one thing to focus your tiny team on and your mind races like you had too much to drink but you’re totally sober.”

To cope with the deluge of advice, Ms. Morrill said she has had to start turning a deaf ear to many of the suggestions. “I love those Beats commercials where the basketball player puts on his music and tunes it all out, to go win the game,” she said. “That’s what it feels like.”

The ballooning number of angels has been spurred by incredible wealth creation over the last five years in Silicon Valley. The initial public offerings of companies like Facebook, Twitter, Workday and LinkedIn created scores of tech millionaires, many flush with cash to spend on the next generation of new entrepreneurs.

Dave Morin and Kevin Colleran, for example, two former Facebook employees, are now active angel investors. Other prominent angels, like Max Levchin and Marissa Mayer, banked tens of millions of dollars from their days at slightly older web companies like Google and Yahoo.

Brand-name Silicon Valley start-ups such as Pinterest, Uber and Lyft have grabbed attention in recent months with their efforts to raise expansive multibillion-dollar funding rounds. Yet the technology start-up fervor begins at a far earlier stage — when many of these companies are the sum total of just a few people and their MacBook Pros.

The frenzy has now reached the point where tiny start-ups have unprecedented ranks of angel investors. CodeFights, a coding start-up, and Amplitude, a data analytics company, said they secured about 30 angel investors each within the last year. Spring, a mobile shopping start-up, counted about 45 investors in its first round of funding in 2013, according to CB Insights. ZenPayroll, which calls itself a human relations software start-up, has 56 angels.

When Tigran Sloyan, co-founder and chief executive of CodeFights, was looking for funding this year, he wanted to get a well-known angel to commit. He approached Adam D’Angelo, an early Facebook employee and co-founder of the question-and-answer site Quora.

“When I pitched the idea to Adam, he was super on board,” Mr. Sloyan said. By March, a month after Mr. D’Angelo agreed to invest, CodeFights had raised $2.5 million from more than 30 investors. “After they see a name they trust, everybody wants to invest,” Mr. Sloyan said.

In an email, Mr. D’Angelo, who began angel investing after cashing out of Facebook, said that he was drawn to the experience of CodeFights’ founders, the fact that consumers were already using the start-up’s products and the company’s potential market size if things go well. “There is a lot of potential here,” he wrote.

That’s in contrast to the handful of angels — usually five to 10 people — that start-ups typically had in the past. “The total angel scene back when I started in 2006 was 30 or 50 angels, maybe with three to five very active ones,” said Aydin Senkut, founder and managing director of Felicis Ventures, a Silicon Valley firm that focuses on early stage investments. “Now everybody and their family and their pets who have some money want to get into angel investing.”

The growing numbers of angels have spurred competition to get into deals, leading to some questionable practices. Spenser Skates, co-founder and chief executive of Amplitude, said some angels were so eager to put money into start-ups that they barely glanced at deal terms.

“They don’t do the same sort of diligence,” Mr. Skates said. “They hear your story and you send them the paperwork.”

Too many angels can also hurt a start-up and be taken as an indication that a company is not strong enough to attract any one “lead” investor, said Ms. Hua of Apptimize. Many angels may also not know the exact health of the start-up they have invested in when asked by others, which can give the perception that the company is not doing well.

“That communication overhead isn’t something I’d realized would happen beforehand,” Ms. Hua said.

For would-be angels, help is on the way. Mr. Altman’s YCombinator is educating new individual investors and held an event in March at its Mountain View, Calif., headquarters that was essentially a crash course in angel investing. The four-hour, invitation-only event included tips on how to evaluate founders and their ideas and how angels can be helpful to companies they invest in. The event also stressed that angel investing was difficult to do well, and that newcomers should expect to lose money.

YCombinator also warns young entrepreneurs about taking on too much, too fast. “We tell them very explicitly, they should prefer a small number of investors,” Mr. Altman said.